If Obama wants to stop growth-hurting regulations, he should look at the SEC

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In tonight’s State of the Union speech, President Obama will emphasize how government should cut down on growth-hindering regulations. Securities regulations should certainly be on that list.

Last week Goldman Sachs decided to drop American investment for social networking site Facebook while still allowing foreign investment, citing fears of SEC penalties. Under current SEC regulation, when a company reaches 500 shareholders it has to open up its records for disclosure. So Goldman Sachs and Facebook came up with a creative response.

Goldman has created a unique way to cap the number of shareholders: Creating a special delivery unit that would register as a single shareholder, but in fact it would be more like a broker – the actual investors would be Goldman clients, buying shares through Goldman. The SEC decided to take an interest in the deal and began an investigation. The SEC appears to be applying a double standard as it routinely turns a blind eye to investment groups, such as venture capital funds.

When Goldman heard of the investigation they decided to shield themselves from a huge financial liability and cut off investment options for their domestic members. These regulations aren’t applied to foreign investors, giving non-Americans the chance to cash in on arguably the hottest company to come around in the last decade.

Let’s be clear, this isn’t that big of a loss to Goldman (or Facebook), who reportedly will still have well over their $1.5 billion target investment from non-Americans. Instead, this is a loss to the American investor. Enacting rules that make it easier for non-Americans to invest in an American company then Americans seems counter-productive and against the best interests of American investors.